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30 Mar 2020

Important TPR update for Trustees including the flexibility to reduce or suspend deficit repair contributions (DRCs) for three months

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Trustees may decide to reduce or suspend deficit repair contributions (DRCs) for three months

The Pensions Regulator (TPR) has produced further guidance in light of COVID-19 (published on 27 March) for defined benefit (DB) scheme trusteesdefined contribution (DC) scheme trustees, and for DB sponsors.

Requests to reduce or suspend deficit repair contributions (DRCs)

Trustees should consider requests from sponsors to reduce or suspend DRCs (in line with TPR guidance published on 20 March). Where a sponsor is unable to provide time for trustees to assess the covenant and affordability, to obtain appropriate advice and/or to provide the financial information required, TPR expects any reduction or suspension of DRCs to be no longer than three months. Trustees should ensure that banks and other funders are being supportive and that no dividends or other distributions are being made from the sponsor. Trustees may agree to a longer suspension/reduction period (in line with TPR’s 20 March guidance), ideally underwritten by any available protections. Legal and actuarial advice should also be obtained on whether to reduce or suspend DRCs, and on the most appropriate method of doing so.

Completion of scheme valuations

DB schemes that are close to completing their valuations are not expected to revisit their assumptions, although trustees may be advised that it is in the best interests of their members to do so. Post-valuation experience is not required to be taken into account but it should be considered when agreeing recovery plans, and should focus on the affordability of provisionally agreed DRCs for the sponsor.

It may be appropriate in some circumstances for trustees to delay submitting their valuation and associated documents (which may need to be re-negotiated soon) by up to three months, although this may mean trustees fail to meet the 15 month statutory deadline. TPR does not intend to use its power to fine trustees for late submission, but that position will be revisited in three months’ time.

Trustees may decide to delay their submission of the recovery plan by up to three months if they need more time to consider the scheme’s and sponsor’s situation. TPR will not take regulatory action for their failure to submit.

Requests to suspend or reduce payments for future service 

As with requests to suspend or reduce DRCs, any member or sponsor who requests to suspend or reduce future service contributions should be treated in the same way, but there are additional issues to consider (e.g. whether this is allowed under the scheme rules). Legal advice on such matters is recommended.  

Requests to release security

Trustees should consider carefully any request from a sponsor to release security which is unlikely to be in the members’ best interests. Trustees should obtain legal and financial advice if such a request is received.

Investments

In relation to investments, at this uncertain time, trustees should review:

  • their scheme’s cashflow requirements;
  • any specific risks which may now exist within their portfolios or within the sponsor’s business;
  • any previously agreed investment and risk management decisions due to be implemented in the future; and
  • investment governance structures and delegations in the event of trustee incapacity or absence.

An assessment of whether any changes should be made to investment and risk management governance framework should be undertaken.

In its investment guidance for DC schemes, TPR set out recommended trustee considerations to include opportunities to enhance investment or to transfer to a larger, better resourced provider. 

Transfer values

At this time of market uncertainty, members could make inappropriate decisions to crystallise losses or be exploited by scams and unscrupulous financial advisers. Trustees should be aware of this heightened risk to members. They may suspend cash equivalent transfer value (CETV) quotations and payments in order to review CETV terms and/or to deal with any administrative impact due to an increased demand in CETV quotes.  

Any breach of disclosure requirements will still need to be reported to TPR, but it will not take regulatory action in the next three months against trustees who suspend CETV activity. CETV suspension or delayed quotations can continue if it is still in the best interests of members but trustees should be clear on the reasons to do so and notify TPR.

TPR will take a reasonable, pragmatic and proportionate approach to its regulation of schemes in the weeks and months ahead.

Full guidance can be found here: Defined Benefit (DB) scheme funding and investmentDefined Contribution (DC) investment and DB scheme funding: COVID-19 guidance for employers.

We will continue to monitor developments and, as further guidance becomes available from the Government, TPR or HMRC, provide short updates.  In the meantime, stay safe!

If you would like further information on the developments referred to in this edition or on any other pensions legal issues, please get in touch with your usual contact within the Stephenson Harwood pensions team.

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Mark Catchpole

Mark Catchpole
Consultant

T:  +44 20 7809 2059 M:  +44 7767 624 975 Email Mark | Vcard Office:  London